Monetary Policy Shocks and Corporate Financing Decisions

Abstract

In this paper, we investigate how conventional monetary policy shocks influence corporate financing decisions. We find that low-debt firms (i.e., firms with low-debt burdens) respond more positively by raising their leverage ratios after the monetary policy shocks. The low-debt firms mainly borrow through commercial paper and public bonds, indicating that these firms have better access to the public debt market. They spend the borrowed money on R&D expenses, working capital, and cash holdings and outperform other firms in efficiency and financial performance after these monetary policy shocks.

Keywords: Bank loans, Capital structure, Federal Funds Rate, R&D expenses, Firm efficiency